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Obtaining a good CIBIL score – 4 deciding factors

07-Nov-2016 written by : FSI-Team

The CIBIL score is that all-important deciding factor when it comes to your financial health, and making sure it is 'good' – and remains so – is something you always want to ensure. It can be the differentiator between a low rate of interest and the most competitive one, when you decide to avail of finance by way of a loan or credit card. Do keep in mind that to increase CIBIL score you need to be diligent when it comes to your finances.

What then constitutes a good credit score?

Typically, a score ranges from 300 to 900 across each bureau, with slight variations. However while the score range may vary, the constituents of the score remain the same. In India, there are four bureaus (CIBIL, Equifax, Experian and CRIF High Mark) and each of them offers individual credit scores. Of course, these scores are purely indicative of a person’s credit behaviour, and a lender will consider other factors as well, before sanctioning a loan. Further, what defines a good score may also differ from lender to lender.

But what matters the most is that the score needs to be consistently high or good, because that is a parameter that does not vary across lenders. But how then do you know whether your score is good in the first place? Merely assuming that it is probably will not suffice, you need to check your score at regular intervals to ensure that it is as it should be, and if not, takes steps so that better credit score reflects on your CIBIL report.

What are the key deciding factors?

Let's now take a look at what determines your score, and what you need to do to maintain and slowly increase CIBIL score over time.

Payment history – Close to 35 percent of your credit score is determined by this parameter alone, hence it becomes key to having a clean record.

This takes into account the borrower's repayment behaviour in the past, a history of how previous loan accounts and credit cards have been treated by the customer. Needless to say, making timely payment on all outstanding dues is crucial here, for every lender takes into account this factor before extending any fresh credit lines to you. While cards do offer you the option to make minimum payments on your card bill each month, let’s face it – the only person to benefit from the same is the card company! It works in your best interest to not just make timely and consistent payments, but also payments in full. This ensures you do not fall into a debt trap, which can be detrimental to your score in the long run. If you believe that your payment record is not too clear, do get an understanding of how to check CIBIL defaulter and takes steps to rectify the same.

Credit utilisation history – This factor determines roughly 30 percent of your score.

Every credit card comes with a credit limit, which indicates the amount you can comfortably spend on the card at each billing cycle. While a high card limit may seem attractive, do proceed with caution. The credit utilisation limit refers to the combined limit across all cards held by you, and you need to maintain reasonable levels (ideally not exceeding 30 percent of the overall limit) to ensure a good score. Why is that? It’s simple – someone with a high utilisation is likely to be in debt, and can prove to be a red flag for a lender. The thumb rule is to not carry large outstanding balances on your card, but instead display responsible credit behaviour, if you want to stay out of every lender’s how to check CIBIL defaulter list!

Length of credit history – this parameter determines about 15 percent of the total credit score.

What also matters is the amount of time you have open credit lines, and the length of time since the most recent action (in terms of payment history) on that account. This one is actually a no-brainer: the older your account, the more it works in your favour, if it has been serviced regularly and satisfactorily. This means that you need to make timely payments, on or before the due date, for the account to reflect your impeccable credit behaviour. How does this help? Easy – it gives a prospective lender a robust indication of what your repayment behaviour will be going forward with new credit as well.

For those who are starting off new, this is as good as it gets – build a strong, clean credit history by maintaining a new account well, and over time reap the dividend by getting yourself a good credit score.

Credit mix and new credit – These are two factors that jointly account for about 10 percent of your score.

Remember that having multiple lines of credit open at any given time likely hint at credit hungry behaviour, and hence should be avoided at all costs. When a lender views this information, what they see is an individual who relies heavily on credit to possibly even just make ends meet. Opt for a new loan or credit card only when you genuinely do require the same.

When it comes to credit mix, leaning heavily on one type (whether secured or unsecured) of credit worries a lender somewhat. What a lender would ideally want to see is a borrower who can comfortably repay all types of credit and not tend to default on any one (or both!) type(s).

What you need to do

Keep it clean and simple – as a borrower, make sure you are aware of your credit score, know ways to better it (see above!) and maintain the same consistently. It also helps to understand how to check CIBIL defaulter, and know that as an individual only a good credit history will help you stay out of such dubious lists that lenders maintain. The bottom line is, manage your credit responsibly for your CIBIL score to look good.


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